High-frequency trading in equities almost zero: SGX

Published March 16, 2012


One reason is that S'pore has just one execution venue; there are 50 in the US


By R SIVANITHY
IN BOCA RATON, FLORIDA


CONTRARY to popular belief, high-frequency trading (HFT) is virtually non-existent in the equity segment of the local market, Singapore Exchange (SGX) president M Ramaswami told BT here on Tuesday.


'HFT makes up maybe 30 per cent of our derivatives volume but for equities, the percentage is almost zero. Most retail investors are therefore not exposed to any form of HFT.'

Although there is no universally accepted definition of HFT, among its characteristics are the fact that investments are held for very short periods of time and typically (though not necessarily) positions are not carried overnight.

HFT is a form of trading that uses high-speed computing, high-speed communications and technological advances to execute trades in as little as milliseconds.

A typical objective is to identify and capture small price discrepancies with no human intervention using computers to automatically capture and read market data in real-time and transmit thousands of order messages per second to an exchange. In the US, it is estimated that as much as 70 per cent of daily volume is generated by HFT.

Because of the speed involved, there have been concerns in the local market that retail investors and brokers are at a disadvantage when trading against such programmes. In addition, there have been worries that HFT could aggravate a market crash.

'There's a huge area of debate about HFT and the proper policy responses,' said Mr Ramaswami. 'But it's important to know that HFT serves two roles - that of market makers and that of arbitrage players. For the latter, in countries like the US where there are many execution venues or exchanges trading the same product, HFTs can indulge in arbitrage.

'However, because there is only one execution venue in Singapore, we don't have arbitrage-type HFTs, only market-making, which is quite benign.'

In a separate interview, SGX head of derivatives Michael Syn said that HFT proliferates in the US because there are 50 competing trading venues. 'The market is so fragmented there that you need fast computers to find the best price.'

On the concerns expressed by retail investors and brokers, he said that it was likely that this comes from confusing HFT with algorithmic execution trades.

'It could be that what the retail brokers are seeing and are worried about is institutional brokers executing their orders via algorithms. Sometimes, these algorithms don't work so well when markets are illiquid. Nevertheless, we have three levels of control or protection. First, you need market surveillance, which is not necessarily because of electronic trading but actually has been around for for years.

'In my view, our surveillance does a very good job detecting unusual patterns of trading. Second, pre-trade risk controls. Here, we will be introducing measures to enable brokers to limit their clients' positions. And third, circuit breakers, which are also on the way.' - BT